Fresnillo Moves On MAG Silver

In what executives at MAG Silver (MAG-T, MVG-X) are calling a “take-under” bid, a subsidiary of Fresnillo (FNLPF-O, FRES-L) is offering US$4.54 per share in cash for all of MAG’s outstanding shares. MAG shares closed at US$4.02 apiece on Dec. 1, the day the hostile takeover offer was announced, but at US$4.75 the trading day before that.

“This may be the first time in history that a hostile bidder has announced a bid at a price lower than the closing market price of the target’s shares on the trading day prior to announcement,” said MAG’s chief executive Dan MacInnis in a statement. “Analysts and a number of shareholders are now calling this a ‘take-under’ offer. We are a little mystified by Fresnillo’s actions.”

MacInnis also noted that Fresnillo had made several “potentially misleading” statements on a conference call it held with analysts, including the suggestion that there had been extensive pre-bid contact between MAG and Fresnillo about the bid, which he said had not been the case.

MacInnis did not return repeated phone calls requesting comment.

For its part, Fresnillo believes the bid is fair and reflects the current economic environment and in particular, the severity of the ongoing credit crunch.

“There is still a lot of uncertainty in the market (and) no one knows where it is going and of course, there is a liquidity crisis out there, so nobody is really discussing deals in cash so we believe our offer has merit,” Octavio Alvidrez, Fresnillo’s Londonbased head of investor relations told The Northern Miner.

The two companies are joint-venture partners on the Juanicipio silver project in Mexico’s Zacatecas state. Juanicipio is adjacent to Fresnillo’s famous Fresnillo mine, the largest primary silver mine in the world. MAG holds a 44% stake in the joint-venture project, while Fresnillo owns 56%.

With shares of MAG Silver now trading around the offer price, investors are waiting to see the outcome of an independent valuation expected to be completed in the new year, says Andrew Kaip, an analyst at Haywood Securities.

“The general consensus is that it is an opportunistic bid taking advantage of what is going on in the equity markets,” Kaip said in an interview. “The bid should reflect the strategic nature of MAG’s assets and its cash position of C$59.1 million, which it held at the end of the third quarter.”

Juanicipio is just 1.5 km east of where Fresnillo is sinking a 2,200- metre decline and building a 600- metre shaft to access its own Saucito vein. And the joint venture’s Valdecenas vein at Juanicipio lies 2.5 km southwest of the San Carlos vein, Fresnillo’s principal production vein.

In June, the partners released a resource estimate on the Valdecanas vein, demonstrating 7.3 million tonnes in the inferred category grading 1,011 grams silver per tonne, 2.06 grams gold, 2.31% lead and 3.94% zinc. Those numbers add up to about 237.8 million oz. silver, 480,000 oz. gold and 1 billion lbs. of combined lead and zinc.

Subsequent assay results made public in November continue to show high-grade silver intercepts. Drill-hole NE from the central part of the Valdecanas vein, for example, cut 3 metres grading 1,338 grams silver, 3.56 grams gold, 1.63% lead and 7.37% zinc. Another hole to the east, QH, struck 5 metres grading 1,134 grams silver, 0.48 gram gold, 2.51% lead and 6.75% zinc.

In addition to the Valdecenas vein, MAG holds a number of peripheral projects that surround Fresnillo ground.

“The addition of that land really consolidates the district for Fresnillo,” Kaip argues.

Bart Jaworski, an analyst at Raymond James in Vancouver, argues that the offer values MAG at US$176 million net of cash, or US$1.19 per oz. silver equivalent, an 88% discount to the current spot silver price of US$9.91 per oz.

“At these levels, we believe the offer pays for the inferred resource, however, (it) fails to pay for (a) the likelihood that the Juanicipio vein hosts Valdecanas-style mineralization and (b) exploration upside at Cinco de Mayo, Legartos and MAG’s other prospective properties,” Jaworski wrote in a Dec. 2 research note to clients.

Jaworski calculates MAG’s net asset value per share at $13.60. Jaworski has a buy on the stock with a 52-week target price of $15 per share.

Kaip of Haywood Securities noted that there won’t be much interest among shareholders to tender their shares and that Fresnillo will have to either sweeten the offer or restructure it.

One scenario he suggested would be for MAG to be spun off as an exploration company with its cash and other assets in Mexico’s silver belt, such as Cinco de Mayo in Chihuahua, a new silver, lead and zinc discovery. Under such a scenario, Fresnillo might also offer a combination of cash and shares in a new company.

The first hint that a bid might be in the offing came on Oct. 15, when Fresnillo acquired about 19.8% of MAG’s shares.

News of the offer on Dec. 2 sent MAG’s shares up 78¢ apiece, or 15.73%, to close at $5.74 in Toronto. In New York, the company’s shares rose 58¢, or 14.43%, to close at US$4.60 per share.

At presstime, MAG was trading at $5.49 per share in Toronto and at US$4.33 per share in New York.